Key Takeaways
- Non-warrantable condos often come with higher interest rates.
- Non-warrantables often require larger down payments, usually 20% or more.'
- High investor ownership can classify a condo as non-warrantable.
- Non-warrantable condos often face stricter lending requirements.
Article Summary
A non-warrantable condominium is a condo unit or building that does not meet the typical financing or operational standards required for a mortgage approval.
Non-Warrantable Condominium: Explained in Plain English
A non-warrantable condo is a condo unit or building where a home buyer cannot get a conventional, FHA, VA, or USDA mortgage approved because the building fails to meet basic financial or operational stability standards.
Non-warrantable condos are not specifically defined in mortgage guidelines. Instead, condo buildings apply for warrantability status. Buildings that do not meet warrantability standards are classified as non-warrantable by exclusion.
No matter how strong a home buyer's individual mortgage qualifications are, a non-warrantable condo cannot be approved through conventional loans, except through portfolio lending. Use our home affordability calculator to see how portfolio loan rates affect what you can afford.
There are four common reasons why a condominium building may be classified as non-warrantable:
- Building ownership
- Occupancy types
- Financial reserves
- Legal risk
These mortgage lenders offer non-warrantable condo loans.
1. Building Ownership
One key feature of a non-warrantable condo is the ownership structure.
If a single entity owns multiple units in a complex and that ownership exceeds 20 percent of the total units, the building typically falls into the non-warrantable category. High ownership concentrations pose a risk to lenders, as the condo's financial health could be too dependent on the financial stability of one or a few owners.
2. Occupancy Types
Another risk feature in condominiums is the collective occupancy of the building.
If a majority of the units are investment properties or rental units, the condo may be classified as non-warrantable. Lenders view rental properties as higher risk because rental properties may not be maintained as well as owner-occupied units. If the owner of an investment property faces financial difficulty, they may sell the unit at a discount, potentially harming other unit owners.
3. Financial Reserves
When a condo building seeks warrantability approval, its budget and financial health are reviewed.
A condo may be deemed non-warrantable if the homeowners association (HOA) does not allocate at least 10 percent of its dues to a reserve fund for maintenance and emergencies, or if more than 15 percent of the units are at least 60 days past due on their assessments.
4. Legal Risk
A condo building may be considered non-warrantable if the condo complex or its developer is involved in litigation.
However, active or pending litigation does not automatically exclude condo buildings from warrantability—especially if the legal matter is unrelated to the building's safety, structural integrity, or habitability.
Reference: Condo Warrantability
| Condo Trait | Makes Building Non-Warrantable? |
|---|---|
| HOA reserves less than 10% of dues for emergencies | Yes |
| Over 15% of owners are 60+ days late on assessments | Yes |
| More than half of units are rentals or investments | Yes |
| One owner holds more than 20% of all units | Yes |
| Building is currently undergoing minor cosmetic repairs | No |
| HOA fees increased in the past year | No |
Non-Warrantable Condominium: A Real World Example
Imagine a first-time home buyer who wants to buy a condo in a 100-unit complex. The building is well-maintained, and the unit is listed at a fair price on the local MLS. The buyer seeks a mortgage pre-approval from a lender and learns a few important details.
First, the original developer retained ownership of thirty units to rent out when the building was first sold. This concerns mortgage companies because the developer owns 30 percent of the units.
Next, the buyer finds out that twenty-five other condo owners also rent their units, raising the building's renter concentration to 55 percent—well above the limit for condo warrantability.
Then, they discover several unit owners in the building are late on their monthly assessments.
The lender informs the buyer that conventional and FHA loan guidelines prevent them from obtaining financing for a unit in the building. Instead, the lender offers a portfolio loan, which comes with similar mortgage rates but a larger down payment requirement.
Common Questions About Non-Warrantable Condominium
Get answers to frequently asked questions about non-warrantable condominiums, including financing options and qualification requirements.
What makes a condo non-warrantable?
A condo is classified as non-warrantable if it does not meet certain criteria, such as a required percentage of owner-occupied units, limitations on single-entity ownership, appropriate budgeting by the HOA, and the absence of ongoing litigation.
Can you get a mortgage for a non-warrantable condominium?
Yes, home buyers can obtain mortgage financing for non-warrantable condos, but traditional lenders rarely offer these loans. Lenders that specialize in non-warrantable condo mortgages generally require larger down payments and may charge higher interest rates.
What should I do if I'm interested in a non-warrantable condo?
If you're considering purchasing a non-warrantable condo, it is important to understand the financing challenges. Seek out lenders experienced with non-warrantable condo loans and carefully evaluate the investment risks and potential benefits of the property.
Can a non-warrantable condo become warrantable?
Yes, a non-warrantable condo can be approved for financing when the factors disqualifying it from warrantable status—such as high investor ownership or pending litigation—are resolved.
